We hope you are having a safe and relaxing summer and have found a place to get out of the heat. The second quarter ended with stocks and bonds fairly flat for the year overall. Although, there was no shortage of headlines. On the economic front, the dominating issue has been trade wars, and the market reacted to the downside to tariff announcements and potential retaliatory measures. However, the economy and corporate earnings continue to improve and that helped lift the market. Job growth is still strong, and for the first time since 2000 there are more job openings than those looking for work. The tight job market could help push inflation above the Federal Reserve’s target of 2%.
Volatility continues to be the theme of 2018 as we witnessed the S&P 500 giving back 2.6% in the last two weeks of the 2nd quarter closing at 2718.37. Although we have seen a nice rebound through the Independence Day Holiday and the first trading day of this week. The S&P is back testing the June 11th high of 2791.47 area and could see the January 2018 high if we see a breakthrough at the 2800 area.
Year to date, the equities within our portfolios have outperformed our benchmark as small cap US stocks have lead the way with the S&P 600 Small Cap Index up over 12%.
International equities excluding US international companies are underperforming US equities and historically this is typical. In some years international equities will outperform US equities so we will continue to have some exposure in this area of the market. We will continue to stick to our 10/50 rules and remain fully invested in our diversified equity portfolios.
Rising interest rates have also contributed to the muted performance of bonds this year, given the inverse relationship between rates and bond prices. The Fed has hiked interest rates twice this year for a total of seven times since they began raising rates in December 2015. We are seeing a flattening of the yield curve with spread between 2 year and 10 year US Treasuries at 28bps. Couple this with the historical fact that rising interest rates can led to an increased likelihood of a recession.
Our bond portfolio continues to be comprised of bond mutual funds with low duration. This low duration helps reduce volatility in a rising interest rate environment. We are still pleased with our bond portfolios performance compared to our benchmark, however we are cognizant of the changing environment and we are looking to minimize our downside risk and maintain yield within our fixed income portfolios.
Whatever market environment we encounter, we will continue to maintain our disciplined approach to managing your portfolio.
viewpointsObservations and Updates from CCA
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